High Net Worth? Get Thee To An Advisor!

[kcowan]

I suspect it might be because they have the time to be interviewed. Most doctors, lawyers and CEOs would say thanks but no thanks?

[Bylo Selhi]

2. Engineers in both public and private sector

DIYers of the ISTJ or INTJ persuasion

[brucecohen]

I suspect it might be because they have the time to be interviewed. Most doctors, lawyers and CEOs would say thanks but no thanks?

True. And no CEO would ever admit to having personal money management concerns -- even though I've known a few who did.

As well, for all their warts in providing investment advice, retail level advisors are good at stressing the need for budgeting and debt management. So their clients can easily access help. But advisors typically shy away from recruiting public sector employees as clients because they don't offer much potential business. There is little or no need for an RRSP and public sector insurance coverage is generous/effective both pre- and post-retirement. With all income T4'ed as salary, there's not much scope for tax planning either. In many areas, public sector employees also have access to good and even excellent credit unions.

[Insomniac]

That said, over the years I've advised a number of long-service public employees with secure jobs -- mainly cops and teachers -- to stop making RRSP contributions and focus on paying down debt such as home mortgages.

That makes good sense. The RRSP is just deferring taxes. If your retirement income is going to be high, why defer the tax?

[BRIAN5000]

Any brave souls out there that want to post OLD IPS's.

Found and old one of mine which was talking about building a $500,000 portfoio LOL.

[CathyF]

The above-linked report states that households with public sector employees have more in retirement assets than other households, but that's

<snip>

Thank you Bruce, for a thoughtful rebuttal. Bylo's rude snipping and sarcasm was hardly helpful.

I think it's probably just my personal anecdotal evidence that skews my perspective. I know a lot of public servants, and while some are quite good money managers, it seems that many... most even... are not. Their private counterparts seem to be better with money. Wrong circle of friends, maybe!

Again, it may be because most of a public servant's net worth is tied up in a very generous pension. They may just appear to me to be financially strapped, whereas I often don't account for their pension. The present value of it is often well over a million dollars. I expect in retirement the situation will be reversed.

[Bylo Selhi]

Bylo's rude snipping and sarcasm was hardly helpful.

Please be so kind as to point out where and how.

I suggested that your anecdotes and views (like mine) may be skewed by confirmation bias.

You seemed to agree, e.g. "Could be. I honestly don't know."

You continued to agree in the previous post, e.g. "I think it's probably just my personal anecdotal evidence that skews my perspective."

[kcowan]

I expect in retirement the situation will be reversed.

Why would the value of their pensions change? If the investment board is investing wisely or they have the taxayers to fund it, it would solely be a factor of longevity. And given that their jobs are less stressful, they should be looking at better than average longevity, don't you think?

In my company, average longevity was 67-69 for those that retired at 65, but for us early retirees, longevity is decidedly longer, often exceeding 80 by many years.

[Pickles]

I expect in retirement the situation will be reversed.

Why would the value of their pensions change? If the investment board is investing wisely or they have the taxayers to fund it, it would solely be a factor of longevity. And given that their jobs are less stressful, they should be looking at better than average longevity, don't you think?

In my company, average longevity was 67-69 for those that retired at 65, but for us early retirees, longevity is decidedly longer, often exceeding 80 by many years.

Keith, are you saying that while early retirees live until 80, the average worker who retired at 65 only lives to 67 - 69? Why do they die so quickly? Where did you work? A mine?

[Insomniac]

Keith, are you saying that while early retirees live until 80, the average worker who retired at 65 only lives to 67 - 69? Why do they die so quickly? Where did you work? A mine?

Maybe bomb disposal - they send the most senior staff out for the tough jobs.

[peter]

Note: Public sector employees -- who dominate the pension plan population -- typically get maximum PAs which wipe out all but $600 of RRSP room.

Bit off-topic, but I wondered about this. My PA has gone up over the years and RRSP room is now down to $600, but why is there $600 room at all? What's special about $600?

[kcowan]

...Why do they die so quickly? Where did you work? A mine?

Predominantly plant workers who planned poorly for retirement. The live for work crowd.

[brucecohen]

Note: Public sector employees -- who dominate the pension plan population -- typically get maximum PAs which wipe out all but $600 of RRSP room.

Bit off-topic, but I wondered about this. My PA has gone up over the years and RRSP room is now down to $600, but why is there $600 room at all? What's special about $600?

From a Finance Dept document in 1989 when the new system was being implemented:
"The allowance of $600 is an ad hoc adjustment for shortfalls in pension quality (level of indexing, for example) from that assumed in deriving the conversion factor of 9."

I don't remember the exact details, but the Factor of 9 was very controversial as many actuaries attacked it as being too simplistic and unfair to young workers and those in private sector DB plans. So Finance created the offset as a "rough justice" concession. Conceptually, there should be no offset for federal civil servants because the Factor of 9 was based on their pension plan. Nor should there be an offset for other public sector employees whose plans match or beat the federal plan. But it was, in fact, granted to everyone so, arguably, it does not achieve the purpose for which it was intended.

I see that Canada Revenue -- which enforces the rules but doesn't write them -- now states simply that the offset is a minimum level of RRSP room.

[peter]

Interesting, thanks. I should make some time to read up in a bit more detail.

[newguy]

Note: Public sector employees -- who dominate the pension plan population -- typically get maximum PAs which wipe out all but $600 of RRSP room.

Bit off-topic, but I wondered about this. My PA has gone up over the years and RRSP room is now down to $600, but why is there $600 room at all? What's special about $600?

From a Finance Dept document in 1989 when the new system was being implemented:
"The allowance of $600 is an ad hoc adjustment for shortfalls in pension quality (level of indexing, for example) from that assumed in deriving the conversion factor of 9."

I think that's related to 2% accrual rate. I don't get why my gf gets ~$4000 every year in rrsp room. I'm not complaining but she gets 2% accrual so I assumed she'd only get $600.

newguy

[brucecohen]

I think that's related to 2% accrual rate. I don't get why my gf gets ~$4000 every year in rrsp room. I'm not complaining but she gets 2% accrual so I assumed she'd only get $600.

newguy

If her accrual rate really is 2%, she definitely shouldn't be getting that much RRSP room. The PA formula is:

pensionable earnings x (accrual rate x 9) - $600

A 2% accrual rate times 9 = the maximum 18%. Is it possible that only part of your gf's salary is pensionable?

The PA formula already covers the difference among plans in accrual rates. Bob and Mary each earn $60,000. Bob's in a 2% plan while Mary's accrual rate is 1.5%. Bob's PA is $10,200. Mary's is $7,500. The offset was largely meant to cover what Finance officials call "free ancillaries." For example, there's no reduction in RRSP room if the DB plan is fully indexed because inflation indexing is a free ancillary. That's even though hardly any private sector DB plans are indexed, let along fully indexed.

[newguy]

If her accrual rate really is 2%, she definitely shouldn't be getting that much RRSP room. The PA formula is:

pensionable earnings x (accrual rate x 9) - $600

A 2% accrual rate times 9 = the maximum 18%. Is it possible that only part of your gf's salary is pensionable?

Yes, overtime is not counted towards her pension. She probably only works $4000 worth of overtime in total and I expected that would be multiplied by 18%. Another problem is reports come 3 years late from them so I'm still looking at screwed up years from maternity leave. It looks like 36k base pensionable earnings and she earns now around 40 - 45k. The tax info (RSRP lim and PA) are all current.

That's even though hardly any private sector DB plans are indexed, let along fully indexed.

That's another problem, she only gets 1/2 the rate of inflation for indexing and that is public sector.

newguy

[j831robert]

Early retirement survival rates - interesting ! I seem to recall that the survival rate of 'old soldiers' when we were all deemed 'to old to cut the mustard' at 55 yrs of age back in the '70s and -'80s and retired to pension was shockingly short compared to their civilian counterparts. Possibly due to being ill prepared for life without order and routines. I'm sure that stats to support this are available in some federal archive but the rationale is open to question. I, for one, wake up every morning with a grin having survived 25 years of feeding at the fully retired trough - if I can hang in there for another ten years my pension drawing years will match my years of service.

[Flights of Fancy]

I suspect that result is just randomness in action. The average number of years a North American lives past age 65 is right about 20 - but the (observed) variation around that average is very high. There's a chart in Pensionize Your Nest Egg which shows the mean and 1 standard deviation for longevity after 65 which makes this point.

[peter]

My accrual rate is 2%, with 60% non-guaranteed indexing to provincial inflation, and my RRSP room has gone down from ca. $4k per year in 2004 to $600 since 2010. I never understood why I had that much RRSP room initially, the current $600 makes more sense.

[brucecohen]

My accrual rate is 2%, with 60% non-guaranteed indexing to provincial inflation, and my RRSP room has gone down from ca. $4k per year in 2004 to $600 since 2010. I never understood why I had that much RRSP room initially, the current $600 makes more sense.

The inflation indexing is a "free ancillary" and thus irrelevant to the PA calculation. In 2004 were you, life newguy's gf, in a position where you made substantial overtime or other income for which there were no DB credits? Are you now in a managerial or other position where most/all of your income is pensionable salary?

[peter]

Ah. I assumed I had a vanilla salaried position with no overtime/bonuses etc but that isn't actually true. Part of my salary is/was an external supplement that apparently isn't part of my pensionable earnings. This supplement was subject of a lot of discussion and grievance procedures by the union because of its structural nature and I thought the final outcome was that it was part of my salary, but I guess it's not for pension purposes. That does explain the ~$4k (18% x $20k) and the current $600. Thanks!